Banks across the UK and Europe are increasingly renegotiating loans with landlords amidst a persistent slump in commercial real estate values, a situation that has put considerable strain on the sector. This downturn has forced lenders and borrowers into a cooperative stance, with many banks opting to extend loan terms, adjust interest rates, and seek additional equity contributions from borrowers as a means to avoid forced sales amid stalled property valuations. The industry has coined this approach “extend and pretend” or, more candidly, “delay and pray,” reflecting both the hope and uncertainty underpinning the strategy.

This approach offers temporary stability but raises questions about its sustainability. David Eden, managing director at the restructuring firm Kroll, told the Financial Times that this measure “cannot carry on indefinitely,” highlighting the mounting risks lenders face as they navigate the correction triggered by rising interest rates following the post-pandemic inflation surge. The impact on valuations has been severe; for example, London office values have declined by approximately 37% since early 2022, according to property analysts Green Street. This steep depreciation has sharply curtailed dealmaking—global transaction volumes fell by 45% between 2022 and 2023, underscoring the freeze in sales and refinancing activity.

The challenge does not end there. Landmark properties, such as the City of London’s distinctive “Can of Ham” building, have been caught up in valuation disputes that scuppered sales, demonstrating the difficulties even for high-profile assets. Although interest rates are beginning to ease, the pace remains insufficient to trigger a robust bounce-back. Reports from Bayes Business School project only a modest recovery in 2024 across major markets, including the UK and Germany, suggesting that optimism remains tentative.

Landlords and lenders, which increasingly include non-bank and private debt funds, are focusing on extending and revising loan agreements in the hope of a future uplift in property values. Andrew Antoniades, head of lending at CBRE, explained that “the phrase delay and pray has been well used,” capturing the cautious posture of many lenders who sometimes must balance the potential for a near-term valuation recovery against pressing technical defaults. He noted that lenders frequently employ a toolbox of responses—tweaking interest rates, demanding extra equity injections, or refinancing with alternate lenders—to manage risk and sustain their exposure.

Despite the current reliance on this strategy, analysts urge caution about its long-term viability. Jess Qureshi, an analyst at Knight Frank Capital Advisory, remarked on the relative conservatism of current leverage levels compared to prior downturns, which may cushion some risk. Yet the pressure on balance sheets remains acute, particularly as broader European banks grapple with ongoing uncertainty tied to the collateral value of their commercial property loan books. This unease is rooted not only in market shifts and increased borrowing costs but also in regulatory changes that intensify the scrutiny on lenders’ exposures. The European Central Bank is actively exploring measures to reduce the impact of volatile valuations on these banking institutions.

The extend and pretend strategy can be seen as a double-edged sword; while it helps avoid immediate losses from foreclosures, it risks accumulating distressed assets and placing further strain on financial institutions if property values fail to recover as expected. Industry observers note this approach has led to a surge in loan modifications globally, with nearly $40 billion in adjustments over recent years, highlighting a broader market grappling with volatility and uncertainty.

Meanwhile, the funding gap looming over Europe’s commercial property sector further complicates the outlook. CBRE estimates a shortfall of €176 billion across 2024 to 2027, predominantly hitting the office and multi-family housing sectors. This gap reflects the substantial volume of private real estate debt originated in prior years that may not be refinanced due to deteriorating market conditions and lender caution.

Nevertheless, the UK market shows some tentative signs of stabilisation. In the second quarter of 2025, office values in the UK edged up by 0.8%, outpacing the modest 0.3% rise across Europe, as reported by Altus Group’s Pan-European dataset. This marginal growth is attributed to supportive yields and ongoing rental income growth, which have bolstered investor confidence. Yet, these gains should not obscure the fact that UK office values have fallen by 7% over the past three years, underscoring the continuing challenges within the sector.

More positively, projections from specialist lender Together suggest commercial property lending in the UK could rise by 32% from £90 billion in 2023 to £118 billion by 2028. Economist Rob Thomas notes that while higher interest rates require market participants to adjust their strategies, there remain significant opportunities, particularly as developers and investors look to diversify and expand their portfolios into emerging growth sectors.

In summary, while the current “extend and pretend” strategy may offer a breathing space for UK and European commercial property markets, the underlying pressures from depressed valuations, uncertain refinancing prospects, and structural market shifts indicate caution is warranted. The coming years will be critical in determining whether this approach merely postpones reckoning or helps pave the way for a sustainable recovery.

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Source: Noah Wire Services